Friday, 29 June 2012

Here's the
widely-held view. Germany must stop being intransigent, bail out the
Southern Europeans (and thereby save the world economy) by standing
behind their debt and/or issuing new Eurobonds. The political price
for that is some degree of fiscal and political union. (Yesterday's agreement is a step along this path.)

This is nuts.

First,
it doesn't solve the problem except in the short-run. Eurozone debt
in the aggregate is about 80% of GDP and this is being bandied about
as less than the US and therefore somehow manageable. Well, yes it is
better than the US, but that does not necessarily make it manageable
with low European growth rates. And this number does not include the
very large off-balance-sheet liabilities from e.g. public pensions.
There is a story from The
Big Short about
a trader who decided that some of these US mortgage securities were
going to blow up. This smart guy therefore planned a massive swap for
other, safer mortgage securities, which he had to accumulate in large
quantities. Unfortunately he missed the big picture: all the
mortgages were crap. He ended up buying a load of junk from the
book's autistic Goonie heroes.

For
mortgages, read Euro debts. What if they’re all crap? (Le Monde Diplomatique describes a French movement to “re-examine” their public debt.)

The political side
of the Grand European Compromise is equally unappealing. What Greece,
Spain et al. are being offered is essentially “Germany chooses how
much you can spend”. This is not democratic, and there is no
way it can be made so. (The European Parliament? Please.) Even if these decisions were made by an elected body at European
level, this would still be a massive increase in centralization, with
a concomitant massive decrease in human freedom. The famous EU
“democratic deficit” has deep causes: no European public sphere,
not enough common interest and/or mutual altruism for a true European
demos.

In better times,
the lack of democracy would just be a worry for earnest political
theorists. Most people care about “output legitimacy” i.e. bread
and butter. Unfortunately we are going through a very painful crisis
and there is no output legitimacy: all politics has to offer European
nations at the moment is blood, toil, tears and neoliberal reforms.
That offer is far from attractive when made by your own politicians.
Even less when it comes from foreign politicians and bureaucrats. In
tough times, communal solidarity is not a luxury but a necessity.

Conclusion: we are
trying to avoid ten years of economic pain, by setting ourselves up
for a century of political disaster.

Why
David Cameron is going along with this and demanding that Europeans
implement the Grand Compromise, I do not know. The best outcome
possible is that Britain ends up with a politically unified Eurozone
as its nearest neighbour, thus defeating our central foreign policy
objective for the past three hundred years. The more likely outcome
is that we end up as neighbours of a continent-sized Argentina. This
suits the short-term interest of the banks, not the long-term
interest of the nation.

Coming back from
ESA. New York was great and the conference was fabulous too. There
were several panels on “dishonesty and corruption”. A nice one
with Marco Piovesan looked at people who did not buy bus
tickets on the Italian public transport system.

Outsiders often think
of experimental economics as proving that people are much nicer than
Rational Economic Man – altruistic, unfair, averse to inequality
and so on. In fact, a lot of recent work goes the other way,
exploring spite, dishonesty and hypocrisy. The picture of man that
comes out of this is not a Noble Savage, but more a flawed, selfish
creature whose vices are partially checked by his fear of social
disapproval.

I have finished teaching my "Making of Economic Policy" class for the year, and the students have done their exams. Modulo the usual pain for precious research time lost, teaching it was a lot of fun.

Now that I am not going to affect anyone's opinions before the exam, it seems like a good time to describe some of my personal beliefs about the course's topics; and some of my non-beliefs. These are all highly provisional, unscientific and evolving. ("Evolving" is a bit hopeful. Maybe "changing".)

I do not believe that a more open immigration policy to the EU and the UK is an obviously good thing which is held back only by voters' irrational xenophobia.

Friday, 15 June 2012

I got the new Ariely book about dishonesty the moment it landed. Now that is an interesting topic, probably one of the most interesting topics in social science. Why? Well, take any game, i.e. any economic or social situation. Almost all of game theory, i.e. of the study of conflict of interest, becomes irrelevant if the players can sign contracts, because they can just agree on one of the possible efficient solutions. So why then is game theory still widely studied and important? Because in lots of important situations -- war, crime, non-contractible outputs -- legal contracts can't be made.

Except that if people are honest, then they will do what they say; and so promises become contracts. Robert Solow makes this point in his review of Titmuss' book on blood donation. Thomas Hobbes understood it earlier, and put it as rule number two of the Law of Nature: "That men perform their covenants made."

So, dishonesty makes game theory interesting, and social outcomes much worse for everyone.

Professor Ariely's book has a really simple, interesting thesis. Most dishonesty, he says, is not bad people cheating; it's good people cheating a little bit. The most powerful example is when he computes the money he's lost by being actually swindled, compared to the amounts he's lost because of insurers, advertisers etc. marginally overcharging, marginally exaggerating the benefits of their product, and so on. Anyway, he pursues that thesis in many clever and interesting experiments, all written up in his witty prose. Top-notch popular science.

Ironically for a book on dishonesty, many of the experiments involve deception of (as well as by!) the experimental subjects. For example, sometimes the researchers hire an actor to pretend to be dishonest, so as to see if others copy him. In the world of social science experiments, this is a controversial topic. Sometimes deceipt can be unfair to be participants. A much bigger problem, in my view, is that deceipt is going to make future subjects suspicious. Suppose this book is as successful as it deserves -- and students love this behavioural stuff right now. Suddenly, all our potential experimental subjects are going to be in our labs going "where's the trick? Who's the actor?"

Of course, once that happens, we lose control and have no way of knowing how subjects see their situation. (Here is the classic example: when a subject in a psychological experiment had an epileptic fit, 3 of 5 other subjects thought this was part of the experiment!)

For this reason, many experimental economists believe, as I do, in making experiments honest wherever possible. Then at least our experiments will have a good reputation. In future, we may even have to announce "In our experiments, unlike the psychology department's experiments, you will not be deceived"! That's harsh, but if psychologists like Dan Ariely keep writing these brilliantly popular books about experiments where they deceive people, it may be necessary.

So, this Nature paper has been a weekend hit. It links threatened species to trade routes and shows that trade is a cause of loss of biodiversity. Or so it argues.

I am not sure the paper supports that claim, though. Suppose monkey production threatens a species of coffee -- hmm, too early in the morning. Try again. Suppose coffee production threatens a species of monkey, and suppose that 90% of coffee is exported. The paper then argues that 90% of the expected biodiversity loss is also being exported.

We seem to be missing a counterfactual. What would happen if the trade weren't there (e.g. if it were banned)? Presumably economic activity would not stop but would be diverted to alternatives. Some of those would be more ecological, some would not. Subsistence agriculture, plus overpopulation, can be pretty devastating to habitats, right?

It is surely true that rich countries have exported environmental destruction to poor countries which have lower protections for public goods. (Although those countries may also put a higher priority on economic growth.) And biodiversity certification a la the Rainforest Alliance logo might be a solution. It's just that I'm a bit unclear what the paper is actually estimating.

Recent theoretical work suggests that state shifts due to fold bifurcations are probably preceded by general phenomena that can be characterized mathematically: a deceleration in recovery from perturbations (‘critical slowing down’), an increase in variance in the pattern of within-state fluctuations, an increase in autocorrelation between fluctuations, an increase in asymmetry of fluctuations and rapid back-and-forth shifts (‘flickering’) between states. These phenomena can theoretically be assessed within any temporally and spatially bounded system. Although such assessment is not yet straightforward, critical transitions and in some cases their warning signs have become evident in diverse biological investigations, for example in assessing the dynamics of disease outbreaks, populations and lake ecosystems. Impending state shifts can also sometimes be determined by parameterizing relatively simple models.

I had no idea there was a science of predicting state shifts... how cool. I wonder if you could apply it to social revolutions.

Saturday, 9 June 2012

I went down to the river, it was fun. I couldn't see a thing, the crowds were so tightly packed. Eventually on the South Bank I found a very narrow wobbly bit of fencing which people were standing on, and watched the boats go by for half an hour. It was quite fun and I saw a very small figure in white who was the Queen. (I think.) Then there were various small boats from the commonwealth, Dunkirk, etc. etc. Everybody was in a good mood, Union Jacks were everywhere and it only rained at the end.

This week I was chatting to a top academic who said, with a cheerful grin, "I was hoping for the Duke of Edinburgh to keel over. That would have been a result." There you have the republicans' image problem. Lots of them are nice people who bear no malice to anyone and simply want to change an institution; but some of them sound as if they bear a personal grudge against Ma'am herself, and this is not attractive.

I am ambivalent. The monarchy seems to embody some of the best things about Britain, and also some of the worst.

(By the way, that link will teach you the glorious fact that the President of Turkmenistan is called Gurbanguly Berdymukhammedov. If we have a president, let's have him.)

Other than Labor Party politicians, nobody seriously doubts the wisdom of cutting back on the number of public employees or the size of their pensions, or capping welfare payments to any household at the median income, or bringing more efficiency to public education or the public health service through greater competition. The idea that these will be done once the economy returns to normal growth is a political fantasy.